US Sectors: The Good, The Bad, and the Meh

The recipe for outperformance in 2018 has been freakishly simple: overweight the sectors that outperformed in 2017. For example:

Large Cap Technology:

The Tech portion of the S&P 500 is up 7.1% YTD

The S&P 500 itself is up 5.6%

Last year, the group was up 32.2%, versus the S&P 500’s 21.6% return

Financials:

Large cap banks/brokers/insurance companies are +7.6% on the year, also beating the S&P 500

Look back at their performance last year, and you’ll see they squeaked out a small gain versus the index – 58 basis points on a price basis

Health Care:

Even with concerns over the Amazon/JP Morgan/Berkshire deal, the group is still +6.6% on the year

Last year, large cap Health Care beat the S&P 500 as well, by 108 basis points

In contrast, consider the many sectors that are underperforming in 2018:

Utilities

Down 4.6% on the year, the worst of any S&P 500 sector

Price change last year: only up 7.7%

Real Estate

Down 3.7% in 2018, the second worst performing group

Only up 8.5% on a price basis last year

Energy

Large cap Energy names are only up 4.1% for 2018 YTD

They also lagged last year, rising only 4.5%

Consumer Staples

YTD return here is only 1.2%

Last year the group had a 9.5% price return

Telecomm

Up 0.4% in 2018

Down 16.0% last year on a price basis

Now, there are two sectors that performed well last year (coming close to matching the S&P 500 or slightly beating it) that are underperforming in 2018:

Materials: +2.6%

Industrials: +5.2%

And one sector – Consumer Discretionary – needs an asterisk.

The group worked well last year, matching the S&P 500.

And year to date that strength continues, up another 8.0%.

The troublesome bit is that Amazon is 19% of this group by market cap weight and that stock is up 19% in 2018. That makes the company’s gains in 2018 some 45% of the sector’s overall advance. Without Amazon, the group would be underperforming the S&P 500 by a wide margin in 2018.

In terms of actionable investment thoughts with this data, consider the following three points:

US stocks are still a momentum driven market as we move through Q1 2018. The first shall be first and the last shall be last, to borrow and twist a phrase from the Good Book.

Of the leadership groups at the top of this note, we still like Technology and Financials. Of the serious laggards, we would only look at Energy because we believe a growing global economy can support oil prices at current levels.

Of the in-betweens (groups that worked in 2017 but are stuck in purgatory this year), we like Industrials. Their mix of exposure to a weaker dollar and the chance for infrastructure spending hit two themes we think will work in 2018.

Now, if you are a contrarian and want to bet against the crowd, we would advise extreme caution just now. It generally takes a big shift in market psychology to redirect money flows and investor attention once they get set in their ways. That’s why 2018 sector returns look the way they do.